FAQ’s
1. What is a structured settlement?
It’s a financial or insurance arrangement, defined by Internal Revenue Code as periodic payments; a claimant accepts to resolve a personal injury tort claim (a situation where a person’s behavior has unfairly caused someone else to suffer loss or harm. A tort is not necessarily an illegal act, it just allows someone to recover the loss or harm) or to compromise a statutory periodic payment obligation, like winning the lottery.
2. What is the difference between Qualified Settlement Fund and a non-Qualified Settlement Fund?
A qualified settlement fund is defined as a type of Trust that falls under state law, whose purpose is to resolve any and all claims resulting from an event, and that is court approved, and always will be court approved and monitored.
A non-Qualified Settlement Fund is not court approved and could be subject to being taxed.
3. What is a structured settlement transfer?
The act of transferring the rights of an annuity’s future payment stream that were won as a structured settlement, to a company in exchange for a lump sum of money.
4. Why should I sell my income stream?
People find themselves in situations where a lump sum of cash is required: paying taxes, settling debts, getting a divorce, illnesses, paying for college tuition, buying a home or opening a business. Whatever the reason, more and more people are choosing to take a lump sum of cash today over waiting for future dollars while inflation eats them away.
5. Is selling my future payments legal?
Absolutely. Not only is it completely legal, but the IRS gives tax incentives to encourage the re-sale of structured settlements. Corporate America and wealthy individuals have been buying and selling contracts and income streams to improve their cash flow and meet their financial obligations for years. However, this knowledge has been a well-kept secret from the general public and not until recently has been recognized and defined by state and federal law.
6. Does the company that buys my payment stream need to be FDIC insured?
No. And the fact that they are not should not scare you away. As a matter of fact, the casualty insurer that will eventually pay for your lump sum of money through the company that will buy your payment stream, will probably NOT be FDIC insured either.
7. What happens if the casualty insurer that initially funded my structured settlement goes bankrupt before I cash in my annuity or before they are done paying my annuity?
These companies in this type of situation are usually protected by what is called a State Guarantee Fund through the Department of Insurance of each state. Those funds usually guarantee up to 80% and not to exceed $350,000 for each contract of the original payment amount, should a casualty insurer go bankrupt in the state of California.
8. What is the “disclosure notice” that has to do with me selling my structured settlement? Why is this so important?
This is now required by law. At least ten (10) days before you sign any contract, you should get a “disclosure notice” in the mail from the company who is trying to buy your future payment stream in exchange for a lump sum of money.
“Disclosure notice” means this company HAS to reveal ALL of the terms to the contract in plain English to you in enough time so you can read them over. Elements such as: how much you are selling for how much in exchange? What the discounted present value of those future payments is, in exchange for what you are getting.
What the percentage rate was when used in calculating these amounts, that the company will cover up to $1500 for you to get independent legal advice, that you should also contact a tax person about any possible concerns, that you need court approval, that you may cancel this contract at any time and how to cancel and what to do if you think you’ve been treated unfairly.
This disclosure notice will be typed out in larger than normal font size to get your attention and some phrases will be bold-faced typed enclosed in attention-getting boxes.
9. What can’t the transfer agreement have in it? What should I look out for?
By law, the transfer agreement CANNOT CONTAIN items that:
- waives your right to sue or not
- changes your jurisdiction
- releases the company from taking responsibility if they make a mistake
- waives benefits or rights granted by law with respect to garnishment of wages
- indicate this contract is confidential or proprietary, belonging to the buyer
- says you have to pay for their lawyer fees
- says you have to pay for their tax liability
- or pay for their brokerage fees (they might try to deduct this fee from the purchase price-be careful!)
- changes your domicile state
- changes the controlling law that pertains to where you are domiciled
- that gives you some kind of transfer with a security interest or collateral interest that exceeds that actual dollar amount of what’s being transferred.
- locks you into doing business with ONLY them
- that make all the rules invalid
These rules are found in the California Code of Insurance. They are there now, because this was how the consumer was getting ripped off in the past.
10. Where do I file my petition for court approval to sell my structured settlement?
Your county’s court house, Probate division. You or hopefully your lawyer will also be sending a copy of your petition for approval, a copy of the written disclosure statement, a copy of the transfer agreement itself, a copy of the annuity contract, any qualified assignment agreement, the underlying structured settlement agreement, or any order approving the structured settlement, a copy and proof of notice to the interested parties and a verified statement from you stating that all of the conditions have been met according to the law – all of this to the Attorney General, as well as the county judge with whom you are working, in order to get approval.
If there is a lawyer working on your behalf, he/she will make this happen for you.
11. Will the Attorney General charge me for their services?
They may charge a reasonable fee, and if so, you will be responsible for paying.
12. What exactly do the courts mean when they say, “The transfer is in the best interest of the payee, taking into account the welfare and support of the payee’s dependent’s” when considering my petition for approval?
The courts are trying to look into your future to see if selling your future payments now, will be like shooting yourself in the foot for your future. They take a look at your your employment, or if you are unemployable; whether or not you currently and if you will have your own health insurance and if you have other mandatory payments like alimony and child support. In other words, can you afford to do this?
They will take a look as to why you need to do this now. Is it for a morally sound reason? Is it to invest in crime?
As far as your dependents go, the courts will look to see how many you have, how old they are and if they are special needs, what the college plans are or are not and how their mental and physical health is.
13. The courts won’t sign off on my transfer unless I have been informed in writing by the factoring company to go see a lawyer. Could you explain what’s going on here?
You can either see a lawyer, independent of the factoring company, (or not) regarding this matter. The courts STRONGLY recommend you do. If you choose not to, you have to state this in writing that you are waiving your right to do so.
If you choose to, the factoring company will pay up to $1500 to consult the lawyer of your choice regarding this matter, and the courts want to know if you knew about this.
14. I have consulted with a couple other attorney’s regarding selling my structured settlement. I keep hearing about how other laws might “contravene” with my transfer, or other court orders or government authorities, what is meant by this?
If you have previously entered into contract with another agency that would make the current sale of your future payments illegal, or if you have tried to get court approval before and were denied for certain specific legal reasons, it could have an affect on trying to get court approval now.
15. I am getting cold feet and I don’t think I want to sell my structured settlement, but I have already entered into contract with a factoring company. Do I have to go through with it?
No. You can cancel at any time in writing up until the court approves the contract. You will get notice of when that date would be. Don’t feel pressured to go through with it, just because you’ve engaged the factoring company for a few months over this. It’s your decision and the courts don’t want to pressure you either.
16. What is meant by, “…the courts will consider the totality of the circumstances…”?
The courts will take a look at your age, mental capacity, your legal knowledge, and apparent maturity level. If you’re a little too clueless and show no signs of possibly understanding all of your rights and responsibilities, the court could deny the transfer, they’ve done it before.
Part of the “totality” is also taking a look at why you want to do the transfer. Is it for reckless use of easy money? Is it for a well planned event, like a new home or college tuition?
The courts will also look at your current financial situation – are you desperate? Are you and your family facing a hardship situation? Does your track record show you can handle the responsibility of a large sum of money all at once? And how will your financial situation be in the future if this transfer didn’t happen? Where would you be economically? Are you able to pull yourself out of an economic slump, if you’re in one? Independent of this transfer?
A big issue when considering the “totality” is whether or not you will need medical equipment in the future because of the injury sustained from the personal injury claim in the first place. If so what kind? Major? A new $35,000 power wheelchair? Or just medical check ups? If you sell your future payments now, how would you be able to afford this equipment if needed?
Maybe you’re not going to need medical equipment in the future, but the personal injury has rendered you unemployable, how are you going to take care of yourself in the future if you sell your payments now? If your plan is to get on welfare after you burn through your money, the courts will definitely deny the transfer.
These are most of the considerations by the courts when looking at the “totality” of your circumstances.
17. Will the lawyer that initially handled my settlement be told that I am selling the settlement?
Yes, but only if it is within five years from the date of the transfer you are trying to make now. This will take place before the agreement. This ensures plaintiffs are adequately protected, fully informed and acting in their own best interest.
This disclosure is part of a revision to the structured settlement transfer laws in the state of California that took place in 2009.
18. I have a structured settlement and I am worried that the issuing life insurance company is going bankrupt.
In California, companies offering structured settlements must be first approved by the California Department of Insurance. The department evaluates the insurance carrier’s solvency and whether the carrier complies with California regulations. Carriers are also subject to mandatory annual audits and other financial compliance requirements.
By regulation, all annuity reserves must have assets that are equal to or exceed the corresponding payment obligations. Your existing structured settlement is one of those payment obligations.
In addition, the assets supporting these reserves may not be removed from the insurance company. Reserve sufficiency is mandatory and is frequently monitored by state legislators and auditors. State insurance commissioners have developed these regulations to preserve the ability to meet maturing obligations as they come due of general accounts in which assets are held so that contractual obligations to policyholders (you) are met. These general accounts support only the obligations of the insurance companies-and not the obligations of a parent company or other subsidiaries.
19. What is “present value” and how is it figured out when calculating the sale of my structured settlement?
Present value would be like trying to figure out what a ten dollar bill today – in 2012 – would be worth in 20, 50 or 100 years from now.
In order to obtain the present value, or “discounted” present value, the Factoring Company utilizes the most recently published applicable federal rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service.
For February of 2012 it has been published as 1.4%. (scroll ALL they way down and it’s at the VERY END of this document).
But we’re not done. The purchase price payable to you will be less than the present value of the future payments because the discount rate of your transaction will be greater than the rate utilized by the IRS.
This is where it gets sticky. The Factoring Company factors in it’s own arbitrary rate as well, so they will be sure to make a profit too, and this is perfectly legal. How much this rate is and how it comes to be is purely subjective and what a good lawyer fights to keep low on your behalf.
20. What happens to my structured settlement payments if I die?
This is a common question. Before the end of an guarantee period, any remaining payments due, including any certain or guaranteed lump sum payment(s), will be made as they come due to your beneficiaries of your estate as applicable.
But beware: structured settlement payments to a named beneficiary do bypass probate — but could be subject to the calculation of the decedent’s gross estate when determining if there is any estate tax liability.